GRANTS MANAGEMENT
Part 3 The Proposal Budget – Calculation Methods
A version of this article appeared in Blue Avocado in April of 2024
https://blueavocado.org/finance/grant-proposal-budget-calculations/
In Part 2 of this four-part series we talked in general terms about how we provide a proposal budget that the grantor will find to be concise, comprehensive, and transparent. Now we are faced with putting the numbers on the page. Challenges abound in constructing a one-page budget that includes direct, indirect, and in-kind costs.
Estimating Fringe Benefits
Payroll and fringe benefits are often the largest items in a non-capital grant budget. Calculating salary cost for each position is straightforward, but estimating fringe benefits is not: a significant component of fringe benefits—health insurance— has the unique property of being determined by the employee’s choice of plan. It is impossible to guess whether a new hire will choose family, individual, or no coverage—a wide range of cost.
For a straightforward proposal budget with only a few employees, you may be able to bypass the health insurance conundrum altogether by calculating a lump sum for fringe benefits, using a fixed percentage of salary. Say your organization’s total fringe is $150,000, and total salaries are $500,000. The organization’s fringe benefit percentage is 30% ($150,000 divided by $500,000). Assuming that the grantor does not require fringe benefits to be itemized, you can arrive at your estimated fringe benefit cost by multiplying budgeted salaries by 30%.
For applications where you need to itemize fringe benefits—either because it is required or because it will yield a more accurate result—I recommend that you calculate a fixed amount for health insurance based on the organization-wide average cost per eligible employee. Let’s say, for example, that your organization has 50 employees who are eligible for health insurance (whether they take it or not), and your most recent year’s total health insurance cost was $250,000. Dividing total health insurance cost by 50 employees will give you the fixed, average cost per employee of $5,000. (Note that employees who are not eligible for health insurance are excluded from this calculation.) This calculated average can be used for each full-time equivalent (FTE) position in your budget.
For nonprofits, the ratio of fringe benefits to total salaries is often high because salaries are comparatively low, and many nonprofits make up for the discrepancy with generous benefits, especially health insurance. Many grantmakers understand the challenges we nonprofits face in retaining our workforce. You may worry that your ratio will be too high for a competitive application, but I recommend that you stay the course! Absent any knowledge you have to the contrary, it is safe to assume that the funder will not screen you out based on the fringe percentage. Unless you have another source of funding for the project, you will have to rely on your funding partner to support your employee compensation decisions.
Calculating Allocation of Shared Costs
If the proposed new program will be sharing costs with existing programs, you will need to calculate the allocations for these costs.
Let’s return to an example I’ve used before: say you’re proposing a homeless outreach project which is slated to be a part of the organization’s homeless shelter program. In this scenario, you will share program supervision, office supplies, vehicles, and office space between the new and existing programs.
But you might find that carving out costs from your existing program and moving them to the new one feels like a bit of a shell game. Every cost that you move will affect the original program’s budget—which has probably been carefully crafted to meet the funder’s requirements and may share costs with other programs. We are assuming that the old homeless shelter program has a deficit, so it will ultimately be to your advantage to move some costs to the proposed new shelter outreach program. However, you will need to beware of the dreaded double dipping, where funding for the same expense is requested from two funders. Every CFO knows that this is strictly forbidden, but it can happen by mistake when multiple programs are sharing costs. You also need to avoid surpluses in either program. Surpluses in grant-funded programs can result in a requirement to return funding.
To navigate these rocky waters, try calculating the budgets for both programs in tandem even though the original program budget is not part of the application. This will ensure that the allocations are correct in both. By working on these budgets at the same time, you can make sure nothing is inadvertently lost, you are not doubling up on costs, and you have not created a surplus in either program.
Understanding the M&G Roadblock and Strategizing Solutions
Shared costs such as supplies or supervisory personnel salaries appear as direct line items on the proposal budget, but M&G appears as a single line item after total program expense. It is calculated by multiplying the organization’s M&G ratio by total program expense. [1]
Unfortunately, the public, many funders, and even some nonprofits—have not yet come to terms with the fact that administration and infrastructure are essential functions that must be funded. There is a noticeable trend towards more innovation in foundation funding, but funding for purposes other than direct service is still hard to come by. Sometimes the funder will cap M&G at a percentage as low as 10% or even 5%. An M&G ratio of, say 30%, may reflect activities critical to the health of the organization but is considered by many funders to be too high. Therefore, if you are not able to use the M&G ratio that you need to break even, you will have to either contend with deficits or identify other sources of funding to bridge the gap.
While M&G is by definition indirect and cannot be allocated as a direct program expense, now might be the time to determine if all of your M&G costs are truly M&G. In small organizations, for example, the executive director may spend an average of ten hours per week on program supervision, or a finance department accountant might spend a measurable amount of their time on a specific program. In cases like this, it is entirely appropriate to spread the salary and fringe cost between M&G and program. Using this strategy, not only is the M&G ratio lowered, but costs that are eligible for direct reimbursement are identified.
A word of caution: this strategy will pay off only if you are able to make a significant reduction in your M&G cost. Any M&G employees (including the ED) who split their time with a program may have to complete time sheets each payroll period and/or may be asked by an auditor for documentation of their time spent. If you are able to identify a significant number of M&G employee hours, (especially those paid at a high rate,) to classify as program, it will be worth your while to jump through the extra hoops. A cost-benefit analysis will be required, for sure.
In-kind Goods and Services
A grant application is usually strengthened by demonstrating that the project is supported by other community partners. For example, a homeless program taps into a multitude of community resources from food pantries to health clinics to food stamps to transportation. All of these represent in-kind goods and services that improve the quality of life for the project’s target population.
Certain resources can be quantified and included in the budget. Examples are tangible items such as diapers and formula, volunteer hours, or professional services such as legal, accounting, and software consulting. Donated items appear in the budget as both “in-kind revenue” and “in-kind expense.” The revenue and expense are equal so there is no effect on the bottom line, but the services are quantified and will strengthen the proposal as a whole. A widely accepted value for volunteer time can be found at https://independentsector.org/resource/value-of-volunteer-time/
Documentation of in-kind items is a must for both budget and actual reports. Remember that the budget figures that appear on your application will also appear on your grant reports and payment requests.
Matching Revenues
The inclusion of in-kind revenues and expenses strengthens an application, but sometimes the funder explicitly requires cash contributions from other sources in the form of matching funds. For example, there may be a requirement that 20% of the total cost of the project be funded with other revenues, such as service fees, donations, or other grants.
Service fees can often be allocated from another program using the same principles we use for cost allocation.
Donations and other grants can qualify as matching, but they must be committed. A potential donation with no written pledge would not be considered a match, nor would a grant proposal to another funder that has not yet been submitted or reviewed.
Matching funds can be tricky. As an example of one of an infinite number of nuances, federal funding in one program cannot be used as a match in another federally funded program. If your sources for match are not absolutely cut and dried, your best option is to seek guidance wherever you can, i.e. other CFOs, the funder, or your auditors,
Grant Budgeting is an Exercise in Precision
Budgeting for grant proposals is not a theoretical exercise. The numbers will be the measure for your reports and payment requests. In this way, the CFO walks a tightrope between cost estimates that are too low or too high. As with all budgets, you are working with incomplete information and a poorly functioning crystal ball. If you estimate your costs too conservatively, you risk incurring deficits. Cost estimates that are too high risk surpluses and the possible need to return funding—a fail for both you and the grantor. Either of these can happen through no fault of your own, but with your best efforts and a good relationship with the grantor, these challenges can be overcome. And you will be rewarded when the funding is put to use in service of your mission.
[1] Here’s a breakdown of this equation, again taken from the previous article: In a fictional organization, let’s assume a total M&G expense of $225,000 and a total expense before M&G of $1.5 million. To get the M&G rate, we take $225,000 divided by $1.5 million, giving us 15%. Then, if we say the total proposed project cost is $228,480, we can then multiply that by the M&G rate (15%) to get an M&G request of $34,270. This is what we would ask of from the funder, alongside clear calculations that show how we arrived at that number.